All is Fair Game

Updates For 03/27/2009

March 27th, 2009 2:03 PM

Current News

Government Announces Public-Private Plan to Buy Toxic Assets

The Obama administration unveiled its plan to help banks rid their balance sheets of real-estate related securities that are now difficult to value. The plan relies on a public-private partnership to purchase toxic assets in order to stabilize the economy while limiting taxpayer risk. “We believe that this is one more element that is going to be absolutely critical in getting credit flowing again,” President Barack Obama said. “It’s not going to happen overnight. There’s still great fragility in the financial systems. But we think we are moving in the right direction.”

Officials said the plan will combine private investments and loans from the Federal Deposit Insurance Corp. and the Federal Reserve with $75 billion to $100 billion from the government’s $700 billion Troubled Asset Relief Program to generate $500 billion in purchasing power. Treasury Secretary Timothy Geithner said as much as $1 trillion in toxic subprime mortgages, mortgage-backed securities and other troubled assets may be purchased. To attract private investors, the government plans to offer subsidies in the form of low-interest loans.

The program is designed to help set values on distressed mortgage loans and other toxic securities. If the securities increase in value, the investors and taxpayers would share in the gains. If values fall, the government and investors would incur losses. “A principal virtue of this mechanism is to use the financial interests of investors to help set the price. Because they have money at risk, they’re going to make better judgments about how to set the price for these assets than the government could hope to make,” Geithner said.

The Treasury Department hopes to launch the program within the next few weeks after details are finalized.

Calling the current model “broken,” Rep. Barney Frank, D-Ma., chairman of the House Financial Services Committee, has indicated that he plans to introduce legislation later this year that would restructure government-backed mortgage investors Fannie Mae and Freddie Mac.

Speaking at a recent meeting hosted by the Center for American Progress, Frank asked housing-related organizations to send him their ideas for ways to revamp the government sponsored enterprises. Among the ideas currently being floated is a plan in which Fannie and Freddie would be separated into distinct entities to serve two functions: to ensure adequate funding for the home-mortgage market as a whole and to provide government subsidies for housing low-income people.

Fannie and Freddie, the biggest providers of funding for U.S. home loans, were seized by federal regulators last September after the Treasury was forced to pump massive amounts of capital into the GSEs to keep them operating. The combined losses reported by Fannie and Freddie for 2008 totaled about $108 billion.

As he announced his plan to introduce legislation to reconfigure Fannie and Freddie, Frank last week also called on the GSEs to cancel planned bonuses for executives. Coming on the heels of the controversy in which AIG executives were awarded $165 million in bonuses, Frank is asking Federal Housing Finance Agency Director James Lockhart to “rescind the retention bonus programs at Fannie Mae and Freddie Mac, prohibit any further payment of bonuses to executives under that program, and pursue repayment of any already-paid bonuses.”

As Frank stated in his letter, “I remain very skeptical that retaining and rewarding people who made the mistakes that contributed to the unsatisfactory performance is a good idea. Further, in this troubled economy, and in this job market, it is difficult to imagine that the companies would not be able to find competent and talented replacements for anyone who chooses to leave.”

Fannie Mae Tightens Conditions for Backing Condo Mortgages

As of March 1, Fannie Mae instituted new restrictions that will make it more difficult for condo developers to sell their units. Under the new Fannie restrictions, the government-sponsored enterprise has stopped guaranteeing mortgages in condo buildings where fewer than 70 percent of the units have been sold, which is up from 51 percent previously. In addition, Fannie announced that it will no longer back loans for sales in buildings where 15 percent of current owners are delinquent on association fees or where more than 10 percent of units are owned by a single-entity.

Fannie believes the implementation of new restrictions will protect borrowers from risky investments and safeguard taxpayers (who now own Fannie Mae and Freddie Mac under the government’s conservatorship) from losing money on unstable developments.

Condo developers, however, are concerned that the new restrictions may lead to the early failure of projects and that the now-effective rules will slow down the recovery of the nation’s housing markets.

As of press time, Freddie has yet to adopt Fannie’s new guidelines, though most lenders have already implemented the restrictions. In the coming month, both GSEs are expected to increase fees on condo buyers, meaning that buyers without at least a 25 percent down payment will have to pay closing-cost fees equal to 0.75 percent of their loan, regardless of the borrower's credit score. Fannie and Freddie contend that these raised fees are necessary to protect against higher default rates.

Fannie, Freddie REO Inventory Swells

While Fannie Mae and Freddie Mac boosted their loan modifications by 76 percent in the last three months of 2008, the government-sponsored enterprises also nearly doubled their inventories of real estate-owned properties over the course of the year as they seized properties faster than they could sell them. Such were the findings of a report issued last week, by the Federal Housing Finance Agency, which detailed to lawmakers the actions the GSEs have taken to prevent unnecessary foreclosures.

In addition, the report showed that among the 30.7 million residential mortgages owned or guaranteed by Fannie and Freddie, the percentage of loans delinquent by 60 days or more doubled from March to December of 2008, to 3.02 percent.

The report also showed that the temporary moratoriums on foreclosure sales and evictions announced in November were successful. In December, the percentage of 60-day delinquent loans completing the foreclosure process fell to 0.37 percent, down from the peak of 2.89 percent in July.

The moratoriums, which are intended to give loan servicers time to employ streamlined loan modification criteria developed by the Bush administration, were extended into 2009 as Fannie and Freddie developed new policies on rentals of REO properties.

The moratoriums on evictions will remain in place through March 31. On April 1, the Obama administration is scheduled to launch its "Making Home Affordable" loan modification and refinance program, which has been billed as a comprehensive strategy to get the housing market back on track. Through the Making Home Affordable Program, up to 9 million American families may be eligible to refinance or modify their loans to a payment that is affordable now and into the future.

In its latest mortgagee letter, the Department of Housing and Urban Development has issued new rules setting limits on cash-out refinances. Effective April 1, 2009, the loan-to-value of any cash-out refinance to be insured by the FHA may not exceed 85 percent of the appraiser’s estimate of value.

The FHA’s reduction to the maximum LTV for cash-out refinances is being implemented to safeguard the agency from exposure to undue risk. According to the HUD mortgagee letter, the reduction will be instituted on a temporary basis while FHA further analyzes the housing and mortgage industry as well as its own portfolio to determine whether permanent measures should be taken.

The new underwriting and eligibility requirements for cash-out refinances feature several new rules, including:

- Length of ownership definitions, which, depending on the duration of ownership of a primary residence, allows the borrower to obtain the maximum 85 percent of the appraiser’s estimate of value in the new mortgage.

- Second appraisal requirements for high-balance cash-out refinances, which will require a second appraisal on cash-out refinances that will exceed $417,000 on a property that is in a declining area.

- Non-approved broker fee guidelines, which stipulate that loan origination services may not be performed by a non-FHA approved broker and that the FHA-approved mortgagee shall not compensate the broker for such services.

For more information regarding HUD’s latest Mortgagee Letter, contact the FHA Resource Center at 800-225-5342. Persons with hearing or speech impairments may access this number via TDD/TTY by calling 877-833-2483.

FDIC Testifies before House on Investigating Appraisal Involvement

In testimony last week before the House Financial Services Committee, Federal Deposit Insurance Corporation Vice Chairman Martin Gruenberg called for those responsible for the current housing crisis to be held accountable.

“Immediately following the closing of every failed institution – regardless of size, circumstances or primary federal regulator – our investigations staff and our attorneys who specialize in professional liability issues together begin an investigation,” testified Gruenberg. “The purpose of the investigation is to determine, among other things, whether the failed institution’s directors, officers and professionals, such as accountants, appraisers and brokers, were responsible for its losses, and, if so, to hold them accountable.”

Gruenberg noted that there are currently 4,375 mortgage fraud claims under investigation and an additional 900 civil mortgage fraud lawsuits are expected to be filed over the next three years. The FDIC representative informed the committee that defendants in civil lawsuit cases have primarily been mortgage brokers, appraisers, closing attorneys and other closing agents, as well as title companies, title insurance companies, and other third parties that participated in mortgage fraud against FDIC-insured banks and thrifts.

Under the Federal Deposit Insurance Act, the FDIC may pursue enforcement actions against insured depository institutions and third parties or independent contractors to those institutions, which encompasses appraisers.

With homeowners taking advantage of lower interest rates and higher loan limits, Fannie Mae’s refinancing volume jumped to more than $41 billion in February—nearly three times January’s volume—the company reported. The company said that it was the largest volume in almost a year.

“Borrowers are increasingly taking advantage of the low mortgage rates available in the market today,” said Tom Lund, executive vice president for Fannie Mae’s Single-Family Mortgage Business. “We anticipate that volumes will increase even more as millions of additional homeowners become eligible to refinance under the President’s Making Home Affordable plan. Providing broader access to affordable, sustainable mortgages through expanded refinancing opportunities is a critical part of preventing future foreclosures and hastening recovery,” Lund said.

Since the announcement of the Obama Administration’s Making Home Affordable plan, more than 150,000 borrowers have contacted Fannie Mae to inquire about eligibility.

FHA Commitment Authority Jumps to $315 Billion

As part of the $410 billion omnibus spending bill recently signed by President Obama, Congress raised the Federal Housing Administration’s commitment authority limit to $315 billion to guarantee single-family loans during fiscal year 2009 within the agency’s Mutual Mortgage Insurance Program account. This compares to the agency’s 2008 limit of $185 billion. Ginnie Mae, which securitizes FHA and other government-backed mortgages, also received a $100 billion increase in its commitment level to $300 billion.

Last week, the Senate approved final passage of the FY 2009 omnibus appropriations, which was unfinished business left over from the last year's Congress. And President Obama signed the massive spending bill. The president is expected to unveil details of his FY 2010 budget in April. The FY 2009 appropriations bill includes a 7 percent increase in the Department of Housing and Urban Development's budget to $41.8 billion. The appropriators also allotted $120 million to the HUD inspector general, including $13 million to keep a closer watch on the FHA single-family program. The appropriators also instructed the Government Accountability Office to determine whether the inspector general's office has enough resources to audit FHA's "expanded role" in refinancing subprime, alt-A and other home mortgages.

During 2008, FHA’s mortgage insurance covered $534 billion in single-family loans. Of those loans, 6.82 percent were 90 days or more past due, an increase of 0.84 percent from the same time last year.

Reviewing the FHA Neighborhood Watch data – which detects lenders with abnormally high early default rates – FHA consultant Brian Chappelle reported that newly originated FHA loan performance has deteriorated since June 2008. In addition, the default and claim rate on loan refinances reached 4.75 percent in January 2009, 20 basis points higher than the overall rate for all FHA loans originated over the previous 24 months. Chappelle says it is the first time in the 10-year history of Neighborhood Watch that loan refinances have underperformed recent loan originations.

Mortgage Fraud Reports Increase 26 Percent

Rhode Island made its first appearance as the nation’s top fraud hot spot, according to a study released by the Mortgage Asset Research Institute, with inflated home appraisals being the most prevalent type of fraud in that state. MARI reported a 26 percent increase in the number of mortgage fraud incidents last year compared to the prior year, with fraud on mortgage applications being the most common type of fraud overall.

Rhode Island’s rate, the report said, was three times expected levels. Florida, which ranked first for two straight years, dropped to second, Illinois ranked third, followed by Georgia, Maryland, New York, Michigan, California, Missouri and Colorado.

The increase came as lenders dramatically tightened their standards, making it more difficult for borrowers to qualify for home loans without large down payments, solid credit and proof of their incomes. With credit far tighter, about $1.4 trillion in home loans were made last year, down about a third from a year earlier, according to trade publication Inside Mortgage Finance.

The recession has also increased pressure on shady mortgage lenders and brokers — as well as borrowers — to lie on loan applications, according to the fraud report. More than 60 percent of mortgage fraud cases last year stemmed from falsified applications, while 28 percent came from tax returns or financial statements, and 22 percent came from appraisals, the study said.

“This study illustrates why it is important for lenders to hire and work with professional appraisers,” said Bill Garber, Director of Government and External Relations for the Appraisal Institute. “Lenders can mitigate concerns about mortgage fraud by hiring competent real estate appraisers, such as those who participate in professional appraisal organizations and earned professional appraisal designations like the MAI, SRPA, and SRA from the Appraisal Institute.

As awareness of the mortgage fraud problem grows, law enforcement agencies are stepping up their efforts to combat it. The FBI created a Washington-based national mortgage fraud team in December and has more than 1,600 open mortgage fraud investigations, more than double the number of such cases just two years ago. With so many ongoing cases, FBI investigators are not focusing on individual borrowers, but industry professionals generating fraud schemes that could total as much as hundreds of millions of dollars.

Despite Moratoriums, February Foreclosures Rise Six Percent

According to data released by RealtyTrac, foreclosures in February surged six percent from January levels, and were up 30 percent from the same time last year. “The increase in foreclosure activity from January to February is somewhat surprising, given that many of the foreclosure prevention efforts and moratoria in place in January were extended through most of February as well,” said RealtyTrac chief executive officer James Saccacio.

More than 74,000 homes across the country were repossessed during February, up from January’s figure 67,000, and nearly 291,000 homeowners received at least one foreclosure filing compared to nearly 275,000 in January.

Nevada continued to lead the nation in foreclosures in February with one in every 70 homeowners receiving a foreclosure filing. Arizona posted the second highest with one in every 147 homes receiving a filing. Other states ranking among the top 10 in foreclosures were California, Florida, Idaho, Michigan, Illinois, Georgia, Oregon and Ohio. States with the lowest foreclosure rates included Vermont, West Virginia, South Dakota and North Dakota.

The struggling economy has caused the housing crisis to spread. As reported by the Mortgage Bankers Association, nearly 12 percent of homeowners with mortgages were at least one month behind in payment or in foreclosure at the end of 2008. Since the foreclosure crisis hit in August 2007, nearly 1.2 million homes have been foreclosed.

Housing Data Shows Increase in Building Activity, Sales

February housing starts experienced an increase from January levels, due in part to a large spike in apartment building activity. In a March 19 release, Hanley Wood Market Intelligence reports that total housing starts increased 22.2 percent from January levels to a seasonally adjusted annual rate of 583,000 units. Single-family starts rose 1.1 percent from January while the multi-family sector increased 82.3 percent. Moreover, total building permit activity increased 3.0 percent from January to 547,000 units, with single-family permits reporting an 11.0 percent increase.

As reported by the National Association of Realtors, existing home sales in February had its largest jump since July 2003, increasing 5.1 percent from the previous month to an annual rate of 4.72 million units. However, the number of unsold homes on the market increased 5.2 percent in February to 3.8 million. February’s median sales price dropped to $165,400, down 15.5 percent from the same time last year. Prices are now about 28 percent lower than the peak reached in July 2006.

In the week ending March 13, the MBA’s seasonally adjusted Purchase Index increased 1.5 percent to 257.1 from the previous week’s figure of 253.3. This data shows a 29.56 percent decline from the same period last year. According to Freddie Mac’s March 19 Primary Mortgage Market Survey, average mortgage rates fell 4.98 percent from the previous week. Rates are now slightly higher than the record lows reached in January.